By S. Eva Wolf
The California Court of Appeal recently held, in 926 North Ardmore Avenue v. County of Los Angeles, that a documentary transfer tax is triggered when a transfer of an interest in a business entity that owns real property results in a Proposition 13 change in ownership, even though the underlying real property is not transferred. The California Documentary Transfer Tax Act, which was adopted verbatim in the Los Angeles County Code, applies a documentary transfer tax to “realty sold.” However, the California Documentary Transfer Tax Act does not explicitly provide for a documentary transfer tax on the transfer of interests in a business entity that owns real property (other than transfers of partnership interests that result in termination of the partnership within the meaning of Section 708 of the Internal Revenue Code). On January 14, 2015, the California Supreme Court agreed to review the California Court of Appeal’s decision.
In Ardmore, the apartment building located at 927 North Ardmore Avenue in Los Angeles, California was owned by a living trust established in 1972 by Beryl and Gloria Averbrook. When Beryl passed away in 2007, an administrative trust was established, which later distributed the trust principal to four subtrusts – the survivor’s trust, the exempt marital trust, the non-exempt marital trust and the bypass trust. Gloria was the sole beneficiary of the administrative trust and the subtrusts.
In 2008, the administrative trust transferred the apartment building to 926 North Ardmore Avenue, LLC (“Ardmore”), a single-member limited liability company created to hold and manage the apartment building. The administrative trust later transferred its membership interest in Ardmore to a partnership, BA Realty, LLLP (“BA”), which the administrative trust also owned. Then the administrative trust transferred a 65% interest in BA to the survivor’s trust, a 24% interest to the non-exempt marital trust, a 1% interest to the exempt marital trust and a 10% interest to the bypass trust. None of these transfers constituted changes in ownership for property tax purposes because they were proportional interest transfers under Section 62(a)(2) of the California Revenue and Tax Code.
Shortly after the transfers to the subtrusts, Gloria established irrevocable grantor trusts for the benefit of her two children. The survivor’s trust distributed a 3.5% interest in BA to each child’s trust. Then, in 2009, the survivor’s trust, non-exempt marital trust, and exempt marital trust each sold one-half of their interests in BA to each child’s trust. After these transfers, each child’s trust owned a 45% interest in BA while the bypass trust owned a 10% interest. These transfers were changes in ownership for property tax purposes pursuant to Section 64(d) of the California Revenue and Tax Code.
The Los Angeles County Registrar-Recorder/Country Clerk asserted, and the Superior Court of Los Angeles and the California Court of Appeal agreed, that these transfers were subject to documentary transfer tax. They maintain that the terms “realty sold” in the California Documentary Transfer Tax Act and “change in ownership” under Sections 64(c)(1) and 64(d) of the California Revenue and Tax Code are synonymous, and therefore, a documentary transfer tax is triggered when there are transfers of interests in business entities that constitute Proposition 13 changes in ownership. However, the California Supreme Court will have the final word.
1 229 Cal. App. 4th 1335 (Cal. Ct. Appl. 2014).
2 Cal. Rev. & Tax Code §§ 11911-11930.
3 Id. Although the Documentary Transfer Tax Act does not explicitly define “realty sold” to include Proposition 13 changes in ownership, several county and city ordinances do. S.F., Cal., Bus. & Tax Reg. Code art. 12-C, § 1114; Napa, Cal., Cnty. Code § 3.24.020, Monterey, Cal., Cnty. Code § 5.32.020; Santa Clara, Cal., Cnty. Ordinance Code § A30-39.6, Oakland, Cal., Mun. Code § 4.20.020.